Financially Smart Women Can Answer These 401(k) Questions—Can You?

In my early 20s, my financial goal was simple: Enjoy life and save whatever money was left over. It was easy to live paycheck to paycheck while working in an entry-level job, and any extra funds that found their way into my savings account were a bonus. But in recent years, there’s been a shift. With the prospect of buying a house or starting a family in my periphery, I’ve started to realize how important it is to be financially savvy about investing the dollars accumulating in my account. Worryingly, I had no clue where to start.

Jennifer Kruger, assistant branch manager of Fidelity Investment’s Park Avenue Investor Center says she’s surprised by how many women can relate and are complacent about investing their money for retirement. “I can’t say how often people walk in and say, ‘I have this thing but I know nothing about it,’” she tells MyDomaine. “People fear their 401(k), but it’s just as important as your health. We go for a physical and schedule an annual teeth cleaning; our financial health should be just as important.”

If you’ve been hit with a pang of guilt, that’s okay. Thankfully, Kruger says it’s never too early—or late—to boost your investment IQ. Whether you’re setting up your first 401(k) or need a knowledge refresher to make sure you’re investing wisely, take note—every fiscally smart woman should be able to answer to these questions. How many can you answer?

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To answer this question, you need to have a conversation with your employer to find out what 401(k) plan it offers (if any) and what your involvement options are. “You should bring up the topic of 401(k) plans during the negotiation phase when you’re talking about company benefits,” says Kruger, noting that it’s just as important as salary and bonuses. “You’re limited to the options on your company plan, so you need to know where you stand. I’ve seen it range from hundreds of choices to just 10.” If you want to be involved in the investment process, ask to chat about selecting individual mutual funds to make up your own portfolio.

If your company doesn’t offer a 401(k) plan—or a 403(b), for those working in the nonprofit sector—you can still invest. “That’s where an IRA comes in,” says Kruger. “You can choose to be 100% hands-on with your IRA and aren’t limited by a company.” If that makes you nervous, book an appointment with an IRA provider about different levels of involvement. “There’s much more flexibility [with IRAs]. You can have help with a portion and manage the rest yourself or just hand it over to a provider to take care of,” she says.

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Let’s be clear: Your 401(k) is not an emergency fund, so when setting up your retirement plan, it’s important you treat them as separate entities. Why? “If you make a withdrawal before you retire, you’ll be hit with fees and taxes,” says Kruger. “It’s just not worth it.” Plus, you’re dipping into valuable funds you’ll need later in life. If you don’t have an emergency fund, be sure to build that into your budget. It might mean you need to reduce the amount you contribute to your 401(k) momentarily, but it’s important to make sure the money you dedicate to the fund isn’t withdrawn until the right time.

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Yes, the amount you earn will dictate how much money you can put aside for retirement, but Kruger says you also need to take into account lifestyle expectations. “It’s not necessarily just about money or income. It’s about the lifestyle people want to live later in life,” she says. If you want to travel after you retire or know from your current spending habits that you’ll need a big nest egg, it’s important to take that into account. Translation: The earlier you start investing, the more time you’ll have to take advantage of interest. “I think people have an issue understanding that the short-term benefits of compounding interest. The earlier you’ll start, the easier that will be.”

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If you can’t answer this question, it’s time totake a look at your budget—or start one. According to Kruger, there’s a rough rule of thumb to follow to ensure you’re allocating your money wisely. “Fifty percent of your income should go toward essentials that you need to live, 5% should go toward an emergency fund, 15% should be dedicated to saving for retirement, and 30% should be used for other expenses like paying down debt or starting a college fund,” she explains.

If you’re protesting right now, I get it—the prospect of dedicating 15% of your check to a retirement fund (that you can’t touch) can seem daunting, but don’t let that deter you. “People’s eyes get really wide when they hear 15%. It seems aggressive,” says Kruger. If you’ve just started out in your career and that number seems totally absurd, it’s okay to start small. “It’s not all or nothing. You can start by making a small contribution to your 401(k) and aim to gradually increase that number by 1% each year.”

However, if you do choose to make the minimum contribution to your 401(k), Kruger says there’s one key thing to be aware of: “If your company offers to match your contribution, make sure you do it. If you’re not putting in up to the company match, that’s a big mistake. You’re literally missing out on free money.”

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If you’ve chosen to hand over much of the responsibility for your 401(k) or IRA to a provider, make sure you schedule a checkup date. “It’s easy to forget about your retirement fund if you don’t take a hands-on approach,” says Kruger. “So make sure you schedule a reminder to review your plan at least once a year. Think of it like you would an annual medical or dental checkup.” If you struggle to remember the date, she recommends tying it to a prominent date like your sibling’s birthday or the anniversary of starting your job.

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To some, the thought of investing large sums of money into volatile stocks or bonds can feel like a gamble, but Kruger says knowing your risk tolerance is crucial to finding an investment strategy that works for you. “Ask yourself,what’s your stomach for the ups and the downs in the market? If you are stressed, then you might want to be a bit more conservative when investing,” she advises.

If you consider yourself to be conservative, talk to your provider about an all-weather portfolio. “Imagine a wall made out of one pane of glass. If someone throws a ball at the wall, it’ll shatter and be expensive to fix,” says Kruger. “A diversified portfolio is like a wall made up of 100 panes of glass. If something does go wrong, it’ll affect a small amount, and the wall will stay intact.” If you understand your risk aversion, lifestyle, and goals, you’ll be able to map out a strategy that works for you, both for now and later in life. Believe us—your older and wiser self will thank you.